A few points on bank bonuses

Bank bonuses had nothing to do with the financial crisis. The fundamental issue was low interest rates leading to an unsustainable credit bubble, which was compounded by a variety of factors, ranging from housing policies, accounting rules and capital requirements, to deposit insurance and the expectation that banks would be bailed out if they ran into any trouble. Blaming bonuses is an easy option – which helpfully exculpates politicians, regulators, and central bankers – but it is also lazy and wrong.

The rules on bank bonuses are already pretty strict. You wouldn’t know it from the current furore, but bonuses have already been the subject of extensive government intervention. The code published by the Financial Services Authority in December, which applies to some 2,500 UK firms, significantly restricts the proportion of bonuses that can be paid in cash and insists that they be spread over 3-5 years. It’s a little rich for the government to complain when their own, recently passed regulations are being complied with.

Bonuses are a sensible way for banks to manage their payroll. Because financial business is volatile, financial institutions try to keep their fixed costs low. As such, bankers often receive lower basic pay than people in other comparable professions, but get larger bonuses. Really, this is how people should look at it: bankers don’t have bonuses per se, they just have variable pay.

Like it or not, Britain needs the City of London. Let’s not forget that the City contributed an estimated £53.4bn to the 2009/10 tax take. That’s 11.2 percent of government revenue. No one denies the pressing need for reform of the financial services industry, but we don’t do ourselves any favours by bullying bankers all the way to Zug.

Envy-ridden, class-war politics is the last thing Britain needs. The most depressing aspect of this debate is how little attention is paid to economics – and how much time is devoted to pandering to people’s prejudices about the wealthy. We need to examine policy options rationally, and ditch the class war rhetoric. Too often Britain is a country that denigrates success rather than celebrating it, and in the long run that will do us just as much harm as misguided regulations and taxes.